China resurrects important issues at G20 Finance Ministers’ meeting

China has taken the
helm of the G20, hosting the first meeting of G20 Finance Ministers last week,
while global storm clouds are brewing. The Ministers’ short communiqué underwhelmed
many observers, despite a shift towards recognising that greater public
spending or tax cuts may be necessary to stimulate the economy. China also
signalled its intention to reopen major issues related to reforming the
international financial system.

China’s first opportunity to chair the G20 comes at a time
when the global economy looks extremely fragile. Emerging markets, including
China, are one major focus of concern. Low commodity prices, particularly the
collapse of the oil price, have hit several emerging markets, while capital flows to these countries have also
reversed. The volatility of the Chinese stock market and declining growth
figures have eroded confidence in China’s previous position as a stable growth
provider for the world economy.

Despite the calm tone of the communiqué, G20 Finance
Ministers are clearly very worried. They
note that “downside risks and vulnerabilities have risen, against the backdrop
of volatile capital flows, a large drop of commodity prices, escalated
geopolitical tensions, the shock of a potential UK exit from the European Union
and a large and increasing number of refugees in some regions”.

Ignoring the reference to ‘Brexit’ – which seems to have
been a
carefully planted headline grab by the UK government – the major change in
the Finance Ministers’ approach seems to be on the issue of using greater
public spending to revive economies. They note that “monetary policy alone
cannot lead to balanced growth. Our fiscal strategies aim to support the
economy and we will use fiscal policy flexibly to strengthen growth, job
creation and confidence.” This follows the change of tune from both the
Organisation for Economic Co-operation and Development (OECD)
and the International Monetary Fund (IMF) on this issue in
the run up to the meeting. However, there are few concrete promises in the
communiqué, beyond the continuation of work on G20 members’ national growth
plans. These were supposed
to have added 2% to the long run growth rate, but have so far failed to do
so.

Some observers have – rightly – complained about the lack of
transparency, accountability and access that is expected, including for civil
society groups, now that China is at the helm of the G20. However, this is nothing new, as the
transparency and accountability of the G20 is traditionally extremely poor. One
retrograde step can already be seen, however, with the short list of background
documents listed in the communiqué
clearly not reflecting the papers that were actually provided. For example, the
Chinese government provided short issues notes for Ministers and various G20
working groups provided inputs, yet none of these are mentioned. It remains to
be seen whether these will all be released. Given the G20’s past track record,
this cannot be guaranteed.

China puts reform of the monetary system back on the agenda

The G20’s working group on the international financial
architecture has been resurrected by the Chinese presidency, reflecting their –
reasonable – perception that both the governance of, and the issues tackled by,
international institutions do not reflect their concerns or those of emerging
markets and developing countries more generally. It remains to be seen how much
headway the Chinese can make, but important issues that had fallen off the
table are now back on it.

These include “the orderliness and predictability of
sovereign debt restructuring processes” – which, despite the obvious importance
of the issue, has never been tackled by the G20 in a systematic way. The UN’s
progress in this area – developing
a set of principles for the orderly resolution of sovereign debt crises, for example
– has been pushed by emerging markets, with major developed nations,
particularly the UK and the USA, so
far blocking progress towards the much-needed creation of institutions to
resolve such crises in a fair, orderly and sustainable manner. However, it is unclear
whether the G20’s renewed interest in this issue will help to renew the mandate
for the UN Committee set up to tackle this issue, to continue its work in a
transparent and fully inclusive manner, and move from principles to
implementation of fair and effective debt workout mechanisms.

A second key priority of this work area will be to revive
the discussion on how to manage capital flows, including a promise to “… take
stock of and review policy tools and frameworks as appropriate to address
challenges arising from large and volatile capital flows, drawing on country
experiences”. This issue has lain dormant since 2011, when the G20 – at the
insistence of China and other emerging markets – recognised the need of
countries to take a more proactive stance in their management of international
capital flows, and forced the IMF to
backtrack from its previous pro-liberalisation stance.

A third priority will be another resurrection of previous
G20 discussions, this time on the role of Special Drawing Rights (SDRs): an
international reserve asset all IMF members hold. Three issues are at play.
First, the Chinese
renminbi was added to the basket of currencies that determine the value of the
SDR in November last year. This goes beyond Chinese ambitions to expand the
international role of their currency, however, as the second underlying
objective may be to end the dollar’s dominance through its use as the de facto global reserve currency, by
expanding the role of the SDR as an alternative.

The communiqué hints at this, saying the G20 will “support
further work to examine the possible broader use of the SDR”. Thirdly, many
have proposed regular creation of new SDRs as a way of bolstering countries’
reserves, particularly those of developing countries. The UN had previously
proposed creating up to $250 billion annually, and directing the majority of
that to developing countries. The major barrier to this is not inflationary
concerns – the amounts involved are small compared to the global economy – but
the fact that a change to the IMF’s constitution would be required to direct
the majority to developing countries. The size of the US shareholding in the
IMF means that it has a veto over any such changes, as do European countries,
when acting together.

The new reforms promise both a review of the relative voting
shares of member countries, and also “a new quota formula” to determine what
those shares should be. Eurodad and others have long argued that the simplest
way to ensure that all categories of countries have a fairer say at the IMF is
to introduce ‘double majority voting’. This is where agreements need to be
reached between both a majority of shareholders (which favours economically
powerful countries, and, in particular, at the moment, European countries) and
a majority of members, which would give the more numerous developing countries
a stronger voice. It remains to be seen whether reforms will reach for this
level of ambition. The fact that the IMF’s Managing
Director Christine Lagarde was reappointed without opposition for a second five-year
term in February this year does not augur well. Not only does Lagarde
face charges of negligence in public office relating to decisions made
during her time as France’s Finance Minister, but she is the embodiment of the
most glaring failure of the IMF to reform: the fact that, by an unwritten
convention, all IMF Managing Directors have been Europeans.

Tax rule-making excludes many

On tax reform – a
priority of the 2013 G20 – little new is promised, beyond continued support
for the OECD’s Base Erosion and Profit Shifting (BEPS) initiative to address
tax avoidance by multinational corporations.
Eurodad has already noted the major flaws of BEPS – it lacks transparency,
contains significant loopholes, and favours OECD countries over developing
countries, which have had little meaningful participation in decision-making. To
try to tackle the exclusion of the majority of the world’s countries in the
initiative, the G20 Ministers backed the OECD’s creation of an “Inclusive
Framework”. According to the OECD, this will ensure that developing countries
can now participate on an “equal footing”. However, Eurodad has pointed out
the undemocratic nature of this exercise, where developing countries have to
agree to follow all the decisions that have been made in their absence, and
stick to the OECD’s agenda if they want to join.

Focus on private finance for infrastructure remains

The G20’s long-standing focus on using private finance to
mobilise more financing for infrastructure remains unchanged. Eurodad
has critiqued this in the past. The main concrete initiative of the year
will be for “Multilateral Development Banks (MDBs) to present concrete actions
by July to optimize their balance sheets” – an action that was agreed at
Turkey’s G20 last year. Exactly what this means remains to be seen, but the communiqué points
to a familiar theme, encouraging the MDBs to “…attract new sources of long-term
investment financing, including by catalyzing private sector funding”.

To back this up, the G20 asks for “…the development of a
guidance note on recommended policy steps that could contribute to diversified
financing instruments for infrastructure … with special attention to equity
financing by promoting capital markets development, engaging institutional
investors … and promoting infrastructure investments as an asset class”. Eurodad has previously
argued that this agenda – to persuade institutional investors such as
pension funds to invest in infrastructure in developing countries – ignores the
risks that prevent them from doing so, and, in
the guise of ‘mitigating’ such risks, often entails transferring them to the
public sector.

The G20 also promised to enhance “…cooperation among
existing and new MDBs” (emphasis
added) a clear reference to the push by China and other major emerging markets
to create
new institutions to challenge the hegemony of the World Bank and other
western-dominated institutions. In addition to the Chinese-led Asian Infrastructure
Investment Bank – which has nearly completed its governance negotiations, and recently approved
several operational policies – the New Development Bank of the BRICS (Brazil,
Russia, India, China and South Africa) is planning to approve its first batch
of loans in the next quarter.

Financial sector reform: job done?

The G20 Finance Ministers’ communiqué paragraph on financial
sector reform is, in effect, a list of previous reforms that the G20 intends to
monitor. This may reflect a perception that the ‘job has been done’ in this
area – a
perception that Eurodad has argued is misguided. Or it may result from the
Chinese government’s belief that international monetary and institutional system
reform is a more important agenda. It remains to be seen whether this is
correct, and whether the G20 really has the desire or mechanisms to deal with
the major systemic issues mentioned in the communiqué.